Extra mortgage payments: what $100 or $200 a month really saves

A $350,000 mortgage over 30 years at 7.03% means a payment of $2,336 a month, and over the full term you pay $490,821 in interest. Add $200 a month to every payment and you pay the loan off 6 years 4 months sooner and save $122,997 in interest.

• No extra payments
• $200 a month extra

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• No extra payments$0
• $200 a month extra$0

$350,000 at 7.03% over 30 years. Horizontal axis: years since the first payment.

Extra a month	Paid off in	Sooner by	Paid extra	Interest saved
$100	26 years 4 months	3 years 8 months	$31,500	$71,847
$200	23 years 8 months	6 years 4 months	$56,600	$122,997
$500	18 years 4 months	11 years 8 months	$109,518	$217,468
$1,000	13 years 8 months	16 years 4 months	$163,000	$296,188

Why a small amount does so much

Every extra dollar goes straight to the principal. The lender no longer charges 7.03% a year on that dollar, for all the years left on the loan. An extra payment works like a deposit that earns your mortgage rate, guaranteed and without risk.

That is why the savings add up fast: $100 a month cuts 3 years 8 months and saves $71,847; $1,000 a month cuts 16 years 4 months and saves $296,188. And the money you send is not gone: you are simply paying down your own debt sooner.

A lump sum: the earlier, the better

The same goes for a one-off amount such as a bonus, a tax refund or an inheritance. A $17,500 extra payment (5% of the loan) at the end of the first year saves $98,069 and cuts 4 years 1 month off the loan. The same amount after 20 years saves only $16,397, because less debt and less interest are left by then.

End of year	Shorter term: saved	Shorter term: sooner by	Lower payment: saved	Lower payment: new payment
1	$98,069	4 years 1 month	$23,554	$2,218
10	$48,117	2 years 4 months	$15,138	$2,200
20	$16,397	1 year 2 months	$6,915	$2,132

Shorter loan or lower payment?

In the US an extra payment normally shortens the loan and the monthly payment stays the same. To get a lower payment instead you have to ask the lender to recast the loan, which some lenders offer for a fee. Shortening saves more: with $17,500 in the first year it is $98,069. A recast saves $23,554 and lowers the payment by $118 to $2,218. A lower payment helps when your budget is tight; if it is not, keep the payment and shorten the loan.

What to check first

• Prepayment penalty. Most mortgages let you pay extra at any time, but some charge a fee if you pay off all or a large part early, usually in the first few years. Your loan documents say whether yours has one; ask your servicer if in doubt.
• Tell the servicer where the money goes. Mark the extra as a payment toward principal, otherwise it may be held or applied to the next payment.
• Emergency fund first. Money paid into the house is hard to get back out. Keep a few months of expenses in cash.
• Costlier debt first. Credit cards and personal loans usually charge more than a mortgage, so paying them off saves more.
• Pay down or invest? An extra payment earns exactly your mortgage rate, for sure. Investing may earn more over the long run, without a guarantee. The higher your rate, the stronger the case for paying down.

Try your own loan, rate and extra payments in the mortgage calculator (Advanced mode).